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Morning Agenda: Global Markets in Flux

By Sydney Ember October 10, 2014 7:36 amOctober 10, 2014 7:36 am

GLOBAL MARKETS IN FLUX | Volatility is back, DealBook’s Nathaniel Popper writes. Renewed fears of an economic slowdown in Europe and Asia have injected a note of fear into what had been some complacent markets, leading to a sharp sell-off in stocks on Thursday. After a rally on Wednesday, stocks in the United States tumbled 2 percent. Investors around the world have been selling riskier assets, like stocks and oil, and seeking out safe havens, like Treasury bonds and gold, leading to levels of volatility not seen since early this year.

The gloom has been building in recent days as economic data points to sluggish growth, or even contraction, in big economies like Germany and Japan. Global leaders gathered in Washington on Thursday suggested that all of the efforts to stimulate growth in the European Union and Asia over the last few years have yielded disappointing results. The United States has been one of the few bright spots in the global economy. But troubles in the rest of the world could lead to a rocky road ahead for American exporters, and particularly for the energy industry, which has been one of the biggest engines of growth for the United States economy, Mr. Popper writes. The energy sector was hit the hardest in Thursday’s stock sell-off as the price of crude oil fell 1.5 percent.

The rest of the day’s numbers were just as grim. The Dow Jones industrial average dropped 334.97 points, or 1.97 percent, to 16,659.25 on Thursday. The broader Standard & Poor’s 500 fell 40.68 points, or 2.07 percent, to 1,928.21, its lowest level since early August. The Nasdaq composite index fell 90.26 points, or 2.02 percent, to 4,378.34. The yield on the Treasury’s 10-year note is now down to its lowest levels since 2013. On Thursday, it edged up to 2.33 percent, from the year’s low of 2.32 percent late Wednesday. Still, the damage has been worse elsewhere. Most of the gains made in European markets this year have been lost in recent weeks. “I am uncertain there will be very good times ahead if we do not reform now,” Mario Draghi, the president of the European Central Bank, said in a speech on Thursday at the Brookings Institution.

TUNING UP UBS’S INVESTMENT BANK | Since taking over UBS’s investment bank two years ago, Andrea Orcel, a career deal maker, has cut costs, reined in the use of capital and pushed to win more merger and initial public offering business, Anita Raghavan writes in DealBook. “In short, he has been on a mission to transform UBS’s sprawling and unfocused investment bank into a financial powerhouse despite UBS’s desire to limit its scope as the bank shifts its resources elsewhere,” she writes.

Both Mr. Orcel and Sergio P. Ermotti, the chief of UBS, insist the investment bank can flourish under the umbrella of UBS, which has shifted its focus away from investment banking to the steady business of wealth management. But one of UBS’s most vocal investors, Knight Vinke, which has a 1 percent stake in the bank, has argued that the investment bank cannot thrive unless it is split off. More important, it has said, growth in wealth management would be stunted. UBS disagrees, contending that synergies between investment banking and wealth management make the businesses complementary, not contradictory. “We have zero intention of changing our strategy,” said Tom Naratil, UBS’s chief financial officer.

Under Mr. Orcel, UBS’s investment bank has performed well. Last year, Mr. Orcel’s first full year at the helm, the investment bank posted pretax operating earnings of 2.3 billion Swiss francs, nine times the profit in 2012. The investment bank’s return on attributed equity jumped to 28.7 percent in 2013, from 2.4 percent in 2012, helping make Mr. Orcel, who is an Italian citizen, the highest-paid UBS executive in 2013. Still, there are tensions at the investment bank. And Knight Vinke does not seem ready to give up its fight. But Mr. Orcel appears just as determined. “Don’t let anyone tell you you are a support function, a niche business,” he told his team.

SYMANTEC TO SPLIT IN TWO | Symantec on Thursday became the latest technology company to announce plans to split in two, David Gelles writes in DealBook. The company, which has a market value of more than $16 billion, will become two publicly traded companies, with one focused on security and the other on information management. The announcement follows that of Hewlett-Packard, which announced its own breakup plans on Monday. A week before HP’s announcement, eBay said it would spin off its PayPal unit into a new publicly traded company.

Unlike HP, which has been held back by the slow-growing market for printers and PCs, Symantec said both of its businesses were still growing fast. The security business, which is what Symantec is best known for, provides products and services to governments, companies and individuals, and is the market leader. Revenue from the security business was $4.2 billion in the last fiscal year. The information management business creates backup software and had revenue of $2.5 billion last year. The split will be tax free to shareholders, reducing the likelihood of a taxable competing bid from a bigger rival for either unit. No activist investor appeared to be pressing Symantec for a split.

ON THE AGENDA | Import and export prices are released at 8:30 a.m. The International Monetary Fund and the World Bank begin their annual meetings in Washington. Charles I. Plosser, president of the Philadelphia Fed, gives a speech on monetary policy and communications at 9 a.m. at a Society of American Business Editors and Writers conference in New York. Esther George, president of the Kansas City Fed, gives a speech on the economy at 1 p.m. in McCook, Neb. Jeffrey M. Lacker, president of the Richmond Fed, gives a speech titled “Rethinking the Unthinkable: Bankruptcy for Large Financial Institutions” at 1 p.m. at the annual National Conference of Bankruptcy Judges in Chicago.

BERNANKE DEFENDS A.I.G. RESCUE | Ben S. Bernanke, a former chairman of the Federal Reserve, kept his answers brief on the stand in the lawsuit over the 2008 bailout of the American International Group, Andrew M. Kessler writes in DealBook. He affirmed that the global financial system had been on the verge of collapse in September 2008. He agreed that A.I.G.’s collapse would have been “basically the end” of the financial system, so connected was it to other parts of the financial world. But Mr. Bernanke did not agree with the notion that A.I.G. got a raw deal from the Fed, or that it could have gotten a better deal elsewhere.

Mr. Bernanke’s testimony came a day after emails from him were introduced in court. Writing under the pseudonym “Edward Quince,” he indicated his frustration with A.I.G. “acting like an investment bank,” and said he believed that an open-ended loan to the firm amounted to a “bridge to nowhere.” Mr. Bernanke said he either did not recall, or was not particularly knowledgeable about, the specifics of how A.I.G.’s bailout terms came together in September 2008. Instead, he said, he largely followed the lead of the New York Federal Reserve Bank and its president at the time, Timothy F. Geithner. Mr. Bernanke is scheduled to take the stand again on Friday, possibly for the entire day.

Endo Acquires Drug Maker Auxilium with Sweetened Offer | The $2.6 billion deal, which includes debt, is the latest transaction to reshape the drug industry. Auxilium is terminating its deal to acquire QLT.DealBook »

Kindred Healthcare to Buy Gentiva | Gentiva Health Services has agreed to be acquired by Kindred Healthcare for about $720 million in cash and stock after a five-month courtship that led Kindred to bolster its offer by 50 percent, The Wall Street Journal reports. WALL STREET JOURNAL

Brazil’s Oi May Sell Assets, Chief Says | The Brazilian telecommunications company Oi would not undo its merger with Portugal Telecom but could sell Portuguese assets acquired in the deal, Oi’s acting chief executive said in an interview on Thursday. REUTERS

Tech Deals on the Horizon | “This year’s wave of corporate splits across the technology industry will almost certainly turn out to be just the prelude to a fresh round of mergers and acquisitions,” The Financial Times writes. FINANCIAL TIMES

Bill Gross, in His ‘Second Life,’ Strikes a Gloomy Note | In his first investment remarks since joining the Janus Capital Group, Mr. Gross did not disguise his pessimism about the markets or his disappointment over being forced to leave Pimco.DealBook »

I.M.F. Takes Aim at Wall Street’s Pay System | The International Monetary Fund has a few ideas about reforming the Wall Street incentives that played a leading role in the 2008 financial crisis and still pose a threat, William D. Cohan writes in the Street Scene column.DealBook »

Banks Fear Rise of Online Competitors | The financial world is more worried about competition from companies like Amazon and Google than from rival lenders, The Financial Times reports. FINANCIAL TIMES

Espírito Santo Financial to File for Bankruptcy | Espírito Santo Financial, which was a large shareholder of the bailed-out Portuguese lender Banco Espírito Santo, lost a bid last week for creditor protection in Luxembourg.DealBook »

World Economic Forum Raises Annual Fees | The World Economic Forum, whose annual meeting in Davos attracts the world’s financial elite, sent letters to its 120 “strategic partners” saying it planned to raise annual membership fees by 20 percent, The Financial Times writes. FINANCIAL TIMES

Tianhe Chemicals, Under Short-Seller Attack, Loses $3 Billion in Value | Shares in the Chinese company dropped 40 percent on their first day of trading after a five-week halt, imposed after fraud claims by Anonymous Analytics.DealBook »

Dave & Buster’s Prices I.P.O. at Bottom of Its Range | The company priced its initial public offering at $16 a share. It raised $94.1 million and achieved a valuation of $625.4 million.DealBook »

Weakness in European I.P.O.s Is About More Than Volatility | The misfiring of two big Internet debuts is a factor, as is the weak European economy. And investors are more discriminating after a busy year of deals, Quentin Webb of Reuters Breakingviews writes.DealBook »

Box Pushes Into Health Care | The online storage provider Box, which is expected to go public, said on Thursday that it had reached a deal to acquire MedXT, a cloud software company that specializes in medical imagery, ReCode writes. RECODE

Change in Derivatives Doesn’t Resolve Question of Safe Harbors | One way to level the playing field is to simply repeal the safe harbors in the bankruptcy code, writes Stephen J. Lubben in the In Debt column.DealBook »

U.S. Opposing China’s Answer to World Bank | The United States views the proposed Asian Infrastructure Investment Bank as a political tool for China to bring countries in Southeast Asia closer to its orbit, The New York Times reports. NEW YORK TIMES

China’s Bubble Could Be the Next Financial Crisis | “At a time when consumers and governments in the U.S. and Europe have been trying ‒ with limited success ‒ to pare down or at least stabilize their debt burdens, China has been doing the opposite,” Mark Whitehouse of Bloomberg View writes. BLOOMBERG VIEW

Merkel Hints at Economic Policy Shift in Germany | Faced with gloomy economic data, Chancellor Angela Merkel said Berlin might use spending to stimulate growth, a step her critics have long advocated, The New York Times writes. NEW YORK TIMES

Former Jefferies Trader Will No Longer Face Restitution Demand | The government acknowledged there was scant legal precedent for its demand for $1.6 million in restitution from Jesse C. Litvak, who was convicted of securities fraud in March.DealBook »